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Dani Rodrik Is Insufficiently Radical

Today, markets seem to think that large fiscal deficits are the greatest threat to government solvency. Tomorrow they may think the real problem is low growth, and rue the tight fiscal policies that helped produce it.

Today, they worry about spineless governments unable to take the tough actions needed to deal with the crisis. Perhaps tomorrow they will lose sleep over the mass demonstrations and social conflicts that tough economic policies have spawned.

Um, even that isn’t true. Britain embarked on austerity even though there was no hint that bond markets were actually worried about its solvency. American politicians are saying that we have to cut now now now or become Greece, even though interest rates on US debt are at near-record lows. As I’ve written repeatedly, we’re running scared of invisible bond vigilantes.

The point is that policy makers aren’t responding to what financial markets demand — they’re responding to what they believe, thanks to some mystical source of knowledge to which I’m not privy, markets will demand one of these days.

This isn’t the tyranny of the bond market; it’s the tyranny of fiscal fantasies, of speculation about what the bond market might do.